Blood and Gore: talking ’bout their Generation

Long-term investment performance is the firm’s mantra.

Three years after launch is when most fund managers start selling their performance to investment consultants and prospective clients.

David Blood, London-based chief executive of Generation Investment Management, the high-profile fund management company he set up with former US Vice-President Al Gore, says its own returns have been positive and good ahead of its three-year anniversary of investment early next year. However, he underlines the fund manager’s commitment to longer-term performance targets: “We tell investors that it’s not a one- or two-year track record that we want them to consider because that result can be random due to short-term market forces. Our investment horizon is three to five years.”

Generation invests in undervalued stocks it believes will outperform because of future business prospects in environmentally or socially sustainable sectors: “We recognise that if we do not deliver reasonable, if not outstanding performance, then our mantra is in question.”

With assets under management approaching $1bn (€740m) from 15 institutional clients: five in Australia, five in the US and five in Europe, Blood says Generationis ahead of a three-year business plan that targeted half that figure. “All the funds who have mandated us believe in our people and process, but they also believe in long-term investing. Our economics are based on a three-year rolling performance fee, and we don’t get paid the performance fee until the third year. As a result, we don’t find investors in a short-term mode with us.”

“We don’t find investors in a short-term mode with us.”

Despite having its European headquarters in London, Generation has yet to win any UK pension fund mandates. Blood says this is a question of geographic focus. UK investment consultants also tend to recommend managers after three years of good performance: “We do have UK individual clients, but we haven’t won any UK mandates, but that’s because we have only competed in two pitches. We have developed strongly in Scandinavia, for example, where we have won mandates. I would be very surprised if we didn’t have UK institutional business in a year or so. There are funds I think will become clients soon.”
Partnership deals in the retail funds market, such as a recent exclusive tie up with Commonwealth Bank and a distribution arrangement with Sampo, the Finnish financial services group, suggest Generation is tapping into the public recognition of global warming that Gore is beating the drum for.

Its global large cap equities business, the bedrock of Generation’s offer to date, has grown to 14 fund managers. Blood and Gore are the public face of its second preoccupation: advocacy for long-term investment and the incorporation of sustainability into investment decisions: “We both spend a lot of time talking publicly on these topics as well as climate change.”

In addition, every year, five per cent of company profit goes to the Generation Foundation, which aims to promote sustainability in capital markets.

“Every year, five per cent of company profit goes to the Generation Foundation.”

The fund manager is now taking a third strategic step by launching a climate change solutions fund by the end of this year, which will incorporate aspects of private equity investment.

Blood explains: “It will be a hybrid including growth stage private equity investments and small cap equities. We’re not getting into the private equity field per se because we will be selecting companies for investment using our existing investment process. We see a lot ofmedium-sized and smaller opportunities to address the challenges of climate change.”

“We see a lot of medium-sized and smaller opportunities to address the challenges of climate change.”

These, he says, include companies working in the clean energy, carbon capture in sequestration, energy efficiency, and water scarcity fields.

Generation’s targeting of smaller companies could give credence to some commentators who argue that there is potential for a carbon bubble as institutional investors with an existing large cap bias concentrate greater capital in stocks considered more sustainable and less exposed to reputation risk.

Blood says investment in carbon solutions requires a robust focus on the investment opportunities in the market: “It’s awkward because people could lose a fair amount of money just like they did in the boom. There is no question the internet has changed our lives and I am sure that the shift to a low carbon world will do the same, at least from a business perspective. We are at the beginning of the process and clearly there will be winners and losers.”

The rules of investment are also constant: Generation has to buy companies cheaply and sell them higher: “We see plenty of instances of interesting stocks that are way overpriced. We may find the most sustainable company in the world wide but if everyone else knows about it then there’s no value.
He summarises his philosophy thus: “I am not happy investing in businesses that I am uncomfortable with, but I am not prepared to give up value for values. We’re saying we know better ways to invest. This might include identifying crucial people management issues in financial services companies, carbon constraint impacts in the automobile or energy sectors and healthy living potential in retailing. We’re not looking at sustainability in isolation from business, because it should be common sense to business.”

Blood says a key component in the way Generation works is being seen to “walk the talk” and ensure they themselves do not have a “sustainability problem” by investing in a business that ultimately proves to beunsustainable. Generation does not publicly list the shares it holds. But, it says it has a number of major non-governmental organisations (NGOs) as clients that regularly challenge it on the companies it owns. “We are comfortable with that. We understand why we own a business and are able to talk about its sustainability prospects. We tend to look at issues in the broader sense. Single issue NGOs may not agree with our decision to own Nestlé, for example. We’ve had this debate with our clients, who are very demanding. We think that Nestlé has addressed a number of their challenges and we are very interested in their healthy living businesses. We believe there is significant growth potential which is undervalued.”